Indemnity Clauses in Local Government Contracts
| Publication year | 2014 |
| Pages | 53 |
| Citation | Vol. 43 No. 12 Pg. 53 |
Articles Government Counsel
Indemnity Clauses in Local Government Contracts
By Herbert C. (Lee) Phillips
Government Counsel articles provide information to attorneys dealing with state and federal administrative agencies, as well as attorneys representing public or private clients in the areas of municipal, county, and school or special district law.
Coordinating Editors
David D. Smith, Glenwood Springs, of Garfield & Heclit, P.C.—(970) 947-1936, dsmith@garfieldhecht.com; Mary Elizabeth Geiger, Glenwood Springs, of Garfield & Hecht, P.C — (970) 947-1936, mgeiger@garfieldhecht.com
About ttie Auttior
Herbert C. (Lee) Phillips is a founding member of Hayes, Phillips, Hoffmann & Carberry, P.C. and has practiced local government law for thirty-six years, representing counties, cities, towns, and special districts—(719) 836-9005, hcphillips@hphclaw. com.
This article analyzes the legality and enforceability of contractual indemnity agreements when entered into by local governmental entities, and discusses why such indemnity agreements are void and unenforceable in Colorado.
It is a rare week in municipal law practice that counsel for a city or town is not presented a contract that includes a proposed indemnification clause. These provisions generally require the local government to indemnify or hold harmless the other party to the contract from any liability or costs arising from that party's performance under the contract.[1] Indemnity agreements are frequently demanded by vendors of goods and services; software licensors; professionals, such as engineers; and even other governmental entities.
There are many good practical reasons for the local government practitioner to counsel a client to reject language that imposes an indemnity obligation on the local government. These include:
1) the likelihood that this contractual obligation is not covered by the local government's insurance policy or self-insurance pool coverage;
2) the fact that, unless expressly limited, such clauses survive termination or completion of the contract, with the result that they are virtually perpetual;
3) the inherent inequity of such provisions, because they are typically unilateral rather than reciprocal;
4) the unpredictability of indemnity obligations, because they are open-ended and unlimited in scope and amount; and
5) because indemnity clauses are contractual obligations and not tort claims per se, they are probably not subject to the liability limits, notice requirements, or substantive immunities of the Colorado Governmental Immunity Act, even if the underlying claim giving rise to the indemnity may be.[2]
Even putting aside the fact that any client is ill-advised to enter into a contractual indemnity clause, the almost universal consensus among lawyers who have carefully considered the issues is that local governments in Colorado are legally prohibited from entering into these types of arrangements and that, when and if they do, the contractual indemnification obligation is likely void and unenforceable ab init io. Further, given the varied legal reasons an indemnity is likely unenforceable, it does not appear that even qualifying language or narrow drafting would avoid this result. This is so for several reasons, which are discussed in this article.
Local Government Budgeting Restrictions
CRS § 29-1-110 is part of the Local Government Budget Law of Colorado. It states as follows:
Expenditure not to exceed appropriation. (1) During the fiscal year, no officer, employee, or other spending agency shall expend or contract to expend any money, or incur any liability, or enter into any contract which, by its terms, involves the expenditures of money in excess of the amounts appropriated. Any contract, verbal or written, made in violation of this section shall be void, and no moneys belonging to any local government shall be paid on such contract.
(2) Multiple-year contracts may be entered into where allowed by law or if subject to annual appropriation.
Section 29-1-110 applies to all "local governments," a term that is defined broadly to include "any authority, county, municipality, city and county, district, or other political subdivision of the state of Colorado."[3]
A knowing violation of this prohibition by any member of the governing body or any local government or any officer, employee, or agent of any spending agency is malfeasance, which, on conviction, shall result in removal from office.[4] Any...
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